TY - JOUR
AU - Lochner, Lance
AU - Park, Youngmin
AU - Shin, Youngki
TI - Wage Dynamics and Returns to Unobserved Skill
JF - National Bureau of Economic Research Working Paper Series
VL - No. 24220
PY - 2018
Y2 - January 2018
DO - 10.3386/w24220
UR - http://www.nber.org/papers/w24220
L1 - http://www.nber.org/papers/w24220.pdf
N1 - Author contact info:
Lance Lochner
Department of Economics
Faculty of Social Science
Western University
1151 Richmond Street, North
London, ON N6A 5C2
CANADA
Tel: 519/661-2111 ext. 85281
Fax: 519/661-3666
E-Mail: llochner@uwo.ca
Youngmin Park
Bank of Canada
234 Wellington Street
Ottawa, Ontario
K1A 0G9
Canada
E-Mail: plyoungmin@gmail.com
Youngki Shin
McMaster University
Department of Economics
1280 Main Street West
Hamilton, ON
L8S 4M4
Canada
E-Mail: yshin12@gmail.com
AB - Economists disagree about the factors driving the substantial increase in residual wage inequality in the U.S. over the past few decades. We identify and estimate a general model of log wage residuals that incorporates: (i) changing returns to unobserved skills, (ii) a changing distribution of unobserved skills, and (iii) changing volatility in wages due to factors unrelated to skills. Using data from the PSID, we estimate that the returns to unobserved skills have declined by as much as 50% since the mid-1980s despite a sizable increase in residual inequality. Instead, the variance of skills rose over this period due to increasing variability in life cycle skill growth. Finally, we develop an assignment model of the labor market and show that both demand and supply factors contributed to the downward trend in the returns to skills over time, with demand factors dominating for non-college-educated men.
ER -